Some economists predict the Reserve Bank will lower New Zealand’s Official Cash Rate (OCR) into negative territory next year, but the RBNZ says a negative OCR is just one of their contingency plans and is not yet confirmed.
So, why would the OCR go negative and what does this actually mean for New Zealanders?
Westpac NZ Chief Economist Dominick Stephens forecasts the OCR will drop to -0.5% and remain there until 2023.
But a negative rate would have very little impact on Kiwis he says.
“The OCR is a financial arrangement between private banks and the Reserve Bank, and most people don’t need to worry about it at all.
“It will be like any other OCR cut – mortgage rates and term deposit rates will fall a bit,” Stephens says.
Other countries that have implemented a negative OCR include Sweden and other parts of Europe and Japan, but New Zealand has never done this before.
“Research from Sweden and Europe has concluded that negative interest rates were successful in spurring additional loan growth from banks,” Stephens says.
The Reserve Bank’s Chief Economist and Head of Economics, Yuong Ha, says the organisation is constantly reviewing the economic outlook and cannot say when or if they would go to a negative OCR.
“If a vaccine for COVID-19 becomes available and the economy bounces back then we would recalibrate our forecast as needed.
“But the economic fallout from COVID is significant. It’s worse than anything that we’ve experienced in our lifetime and the Reserve Bank has a mandate to protect the economic wellbeing of New Zealanders,” Yuong Ha says.
“The advantage of lower retail interest rates is that it improves cashflow to households and businesses, by lowering the cost of debt. This allows businesses to keep paying wages and investing,” Yuong says.
“It also makes it easier to take up new lending to support jobs and business.
“It supports wealth and confidence by underpinning asset prices and confidence, to encourage consumers to go and spend,” the RBNZ economist says.
A negative OCR would be one way to lower wholesale interest rates but it is not the only tool the Reserve Bank has in its box, it could also consider a funding-for-lending programme for banks to borrow at a low interest rate.
“If we do use a negative OCR, it would not be in isolation, we would do this in conjunction with a combination of strategies,” Yuong says.
“As the central bank, we can't influence retail rates (like mortgage rates) directly, but we can influence wholesale rates to the banks and then retail rates tend to follow.
“We rely on competition through the banking system to funnel the interest rates onto customer costs.
The Reserve Bank says that interest rates worldwide are trending lower and in New Zealand it has been a moving trend over the last three decades.
“Since the 1970s interest rates have been falling. We’re now in a world where inflation is well contained but we don’t want deflation to set in,” Yuong says.
Dominick Stephens says that deflation would be disastrous for the economy, because the price at which businesses sell their products would fall, but their debts and wage bills would not.
“We want strong employment growth, so we need stimulus,” Yuong says.
What is the OCR?
The OCR is the interest rate set by the Reserve Bank and influences the rate of inflation and economic activity.
“Trading banks hold deposit accounts at the Reserve Bank. The Official Cash Rate (OCR) is the interest rate the Reserve Bank pays the trading banks on these deposits,” Dominick Stephens says.
“When the Reserve Bank moves the OCR up or down, it tends to influence interest rates in the wider economy.
“And interest rates tend to influence the economy and inflation. So, by moving the OCR up and down, the Reserve Bank is able to influence the economy and inflation.
“The Reserve Bank uses this power to try to stabilise the economy and inflation – slowing things down when the economy overheats, spurring things along when the economy gets into trouble,” Stephens says.